On October 11, 2012, the CFTC issued No-action Letter 12-15 extending until December 31, 2012 the deadline for registration under the Dodd-Frank Act as a commodity pool operator (CPO) or commodity trading advisor (CTA) by any entity that would have been required to register solely by virtue of its swaps activity. This relief is primarily directed at securitization vehicles, including collateralized loan obligations (CLOs), in response to industry groups seeking an exclusion for asset-backed securities (ABS) issuers from these registration requirements. As of December 31, these entities must either register with the CFTC through the National Futures Association (NFA) or have provided the NFA with a notice of exemption from final rules that require them to register as CPOs or CTAs.

The LSTA recently addressed the impact that the expanded definitions of "commodity pool" and "commodity pool operator" under the final Dodd-Frank rules might have on advisors and managers of investment vehicles that issue CLOs. The expanded definition of "commodity pool" now includes enterprises operated "for the purposes of trading in commodity interests, including any... swap," which includes the interest rate swaps and currency swaps that ABS issuers, including CLOs, often enter into to hedge the transaction's currency and interest rate risk.

This means that CLOs with even a single swap outstanding could now be considered to be commodity pools subject to the Dodd-Frank CPO registration requirements (see Legal Update, Final Rules Amending CPO, CTA Registration and Compliance Obligations Issued by CFTC).

The final rules on CPO and CTA registration contain a de minimis exemption for notional amounts of swap activity that many ABS issuers may qualify for. Pooled investment vehicles with aggregate outstanding notional swap activity below the de minimis levels in each asset class are eligible for exemption from registration as CPOs/CTAs. The de minimis amount is determined by a formula for futures positions (found on page 33 of the final rules) or by the terms of Part 45 of the CFTC's regulations for cleared swaps. Under the final rules, both the CLO manager and its advisor must register, but if a manager of a CLO is exempt as a CPO under the de minimis exemption, the advisor of the same CPO is automatically exempt as well. Practically speaking, the manager would likely seek the exemption.

On August 17, 2012, the American Securitization Forum (ASF) submitted a comment letter to the CFTC seeking relief for securitization vehicles from regulation as commodity pools. In particular, the ASF sought relief for CLOs that invest in at least 85% of their assets in loans or high quality liquid instruments and that only use swaps to hedge against interest rate or currency risk, or against cash flow or timing mismatches.

On October 10, 2012, the CFTC issued a response letter to the ASF and SIFMA granting permanent relief that excludes from the definition of "commodity pool" securitization vehicles that meet the following criteria:

Therefore, "operators" of investment vehicles meeting these criteria need not register as CPOs.

The letter also indicates that the CFTC remains open to considering whether other securitization vehicles that do not meet these criteria might ultimately be exempted permanently from the definition of "commodity pool." For the time being, any ABS issuers, including issuers of CLOs, which do not meet the above criteria still fall within the "commodity pool" definition and would therefore need to either register with the NFA or provide the NFA with a notice of exemption.

The LSTA has also been working to have CLOs expressly exempted from the Volcker rule ban on banks owning or sponsoring commodity pools (for more on the Volcker rule and CLOs, see Practice Note, Summary of the Dodd-Frank Act: Securitization: The Volcker Rule and CLO Exemption).

For more on other issues currently facing CLO managers, see Practice Note, Current Issues Facing CLO Managers.